Grappling with Warsaw's potential
In an interview with Lokale, he expounds on some of the opinions he put forth at the seminar about the office market in Warsaw in particular. Dynamic change won't occur just yet, in his view, but the Polish capital is ultimately set to become a driving force in this region.
At the JLLS seminar at which you spoke, there seemed to be some disagreement between yourself and JLLS' Gareth Jones about how rents might decline or otherwise over the coming months in Warsaw.
I didn't think there was such a difference between what the two of us said. The only issue is that he doesn't believe that rents are declining further, whereas I believe they'll drop more before returning to the level he is predicting. It's just a matter of time. I believe very strongly because of the delay factor in the market that there will still be this downward pressure for the time being.
You also said that there should be no reason that rents in Poland should be any different to those in the West at some point.
We will reach a situation where we enter normal property cycles, going up and down, but I think on average there is no reason why in Poland, or the Czech Republic or Hungary, rents should be at the lowest level in the whole of Europe. The lowest to my knowledge is in Vienna, and I think there are historical reasons for this. That city is totally distinct to any other in Europe because of political and social factors; it's a completely different story there, which requires its own analysis. There's no reason why cities such as Warsaw should offer such low rents, because it has such drive that it will become a dominant center in Central and Eastern Europe and will generate a good deal of economic impetus for the whole region. You can see in other countries, such as Germany, where there are contrasting fortunes between the northern and southern cities, for instance, which is related to the drive in the market there. Munich, for example, has higher rental levels compared to more northern cities and in my estimation something similar will happen to Warsaw as well. This is where we have the lowest unemployment rate in Poland, so there's no way that rents will remain as low as they are now.
But what is your view of the rest of Poland?
Other cities in Poland will continue to experience lower rents than in Warsaw, in my opinion, but there doesn't seem to be any real pattern among the regional cities here, so it's difficult to make any general remarks about them, apart from the fact that it will take some time for rents to reach some level of stability. They have more problems than Warsaw and it will take longer for them to get back on track, but demand will come to these as well. There is not a great deal of modern office space in the regions, but this will arrive eventually because of domestic tender demands. Even in Warsaw, so much of the stock is of poor quality that companies will force this situation to change. Because rents have fallen to such a low level, they are ready to make this step up. Potential clients will get a better impression of a firm because of the environment it works in. For example, as a banker, I always try and arrange meetings at the client's office because it gives me a very good idea of the type of company I'm visiting. So I do believe that domestic companies will increasingly demand higher standards from their office space. This will not happen over the next two months, but it is a process that will occur and will stimulate the extra demand we need to fill up all the buildings in the city.
If you include even the ageing office stock that we have here in Warsaw, it amounts to around four million square meters. If you compare that to cities such as Vienna, Munich or Madrid, for instance, you get a shortfall of eight million square meters, and these are cities with similar populations to Warsaw. These other cities are of course at a higher stage of development, but the Polish capital is definitely heading in the same direction over the next ten to 15 years. With the develop-ment situation we have now in Warsaw, where we are building something like 250,000 to 300,000 square meters annually, we can calculate how long it will take to catch up with those other cities, though the market has to progress in a balanced manner of course. This is, in fact, occurring in Warsaw, where the market is regulating itself.
You indeed made a comment at the JLLS seminar that cast doubt on how much banks could regulate the market.
I have heard a number of remarks at meetings and conferences I've attended which have stated that the discipline in the market is due to the influence of the banks. I completely disagree with this. What they do can only ever have a limited impact on the state of the market. There are some companies which have so much capital that they can do whatever they want. In this case the financing structure is driven by the strength of the company or group itself and not by the position of a project in the current cycle in the property market.
What of the huge potential for mortgage lending that you believe exists in this country?
Last year, a consultancy firm showed me the ratio of the outstanding corporate loan volume compared to GDP, in Spain, over the last ten years or so, in Portugal and in Poland, which was calculated from around three years ago, where the level was about three percent. In the other two countries [Spain and Portugal], however, there was a steep upward curve and was approximately 25 percent in Spain and 18 to 20 percent in Portugal. You can compare the difference. I can also see this from our own portfolios that here in Poland there is extremely short-term lending at the moment, and I almost feel as if I am in El Dorado here, where we just have to attain those same levels [as exist in Spain and Portugal] here. It's just that we have to set up the appropriate structures and digest all the work behind this.
An example of the current situation here is that someone once came to me whose company was experiencing liquidity problems and I asked him to explain the situation. He told me that he hadn't been able to pay his ZUS [social security contributions] for two months because he was short of money, so I got him to detail his assets, which were that he had bought a couple of buildings, and had received a loan as part of this, repayable over five to six years, and now he was in the last year of the repayment schedule. He told me that he just couldn't afford the high debt service he was obliged to pay. And I explained that if he had bought a building for three or four million zloty, then it's a real estate asset, which he acquired four or five years ago, meaning it's clearly worth more now than it was then. I told him: "You borrowed about ten percent of the initial amount from the bank and you say you have a problem?" I advised him to go to his bank and ask them for a restructuring of this transaction. You have an asset that is worth some zł.4 million and have an outstanding loan amount of around zł.500,000, so you just need to get back to the bank and leverage it back and pay what you have to pay. He could leverage the building up to two million and buy new machines, hire new people, and so on. There's no risk for the bank and he is a rich man, though he wasn't aware of it before, and his bank hadn't advised him properly, which I find quite shocking.
To what extent do bankers look more favorably on developers who can put up buildings very quickly and sign big pre-leases with new tenants?
We don't. In a way the bank has an easy role to play in this process. Even if a company is close to bankruptcy, I can usually finalize an absolutely safe deal for the bank. Depending on what kind of product or client I have in front of me, or what location, I can structure my deal around these, and do so at any time for all kinds of project.
At the JLLS seminar at which you spoke, there seemed to be some disagreement between yourself and JLLS' Gareth Jones about how rents might decline or otherwise over the coming months in Warsaw.
I didn't think there was such a difference between what the two of us said. The only issue is that he doesn't believe that rents are declining further, whereas I believe they'll drop more before returning to the level he is predicting. It's just a matter of time. I believe very strongly because of the delay factor in the market that there will still be this downward pressure for the time being.
You also said that there should be no reason that rents in Poland should be any different to those in the West at some point.
We will reach a situation where we enter normal property cycles, going up and down, but I think on average there is no reason why in Poland, or the Czech Republic or Hungary, rents should be at the lowest level in the whole of Europe. The lowest to my knowledge is in Vienna, and I think there are historical reasons for this. That city is totally distinct to any other in Europe because of political and social factors; it's a completely different story there, which requires its own analysis. There's no reason why cities such as Warsaw should offer such low rents, because it has such drive that it will become a dominant center in Central and Eastern Europe and will generate a good deal of economic impetus for the whole region. You can see in other countries, such as Germany, where there are contrasting fortunes between the northern and southern cities, for instance, which is related to the drive in the market there. Munich, for example, has higher rental levels compared to more northern cities and in my estimation something similar will happen to Warsaw as well. This is where we have the lowest unemployment rate in Poland, so there's no way that rents will remain as low as they are now.
But what is your view of the rest of Poland?
Other cities in Poland will continue to experience lower rents than in Warsaw, in my opinion, but there doesn't seem to be any real pattern among the regional cities here, so it's difficult to make any general remarks about them, apart from the fact that it will take some time for rents to reach some level of stability. They have more problems than Warsaw and it will take longer for them to get back on track, but demand will come to these as well. There is not a great deal of modern office space in the regions, but this will arrive eventually because of domestic tender demands. Even in Warsaw, so much of the stock is of poor quality that companies will force this situation to change. Because rents have fallen to such a low level, they are ready to make this step up. Potential clients will get a better impression of a firm because of the environment it works in. For example, as a banker, I always try and arrange meetings at the client's office because it gives me a very good idea of the type of company I'm visiting. So I do believe that domestic companies will increasingly demand higher standards from their office space. This will not happen over the next two months, but it is a process that will occur and will stimulate the extra demand we need to fill up all the buildings in the city.
If you include even the ageing office stock that we have here in Warsaw, it amounts to around four million square meters. If you compare that to cities such as Vienna, Munich or Madrid, for instance, you get a shortfall of eight million square meters, and these are cities with similar populations to Warsaw. These other cities are of course at a higher stage of development, but the Polish capital is definitely heading in the same direction over the next ten to 15 years. With the develop-ment situation we have now in Warsaw, where we are building something like 250,000 to 300,000 square meters annually, we can calculate how long it will take to catch up with those other cities, though the market has to progress in a balanced manner of course. This is, in fact, occurring in Warsaw, where the market is regulating itself.
You indeed made a comment at the JLLS seminar that cast doubt on how much banks could regulate the market.
I have heard a number of remarks at meetings and conferences I've attended which have stated that the discipline in the market is due to the influence of the banks. I completely disagree with this. What they do can only ever have a limited impact on the state of the market. There are some companies which have so much capital that they can do whatever they want. In this case the financing structure is driven by the strength of the company or group itself and not by the position of a project in the current cycle in the property market.
What of the huge potential for mortgage lending that you believe exists in this country?
Last year, a consultancy firm showed me the ratio of the outstanding corporate loan volume compared to GDP, in Spain, over the last ten years or so, in Portugal and in Poland, which was calculated from around three years ago, where the level was about three percent. In the other two countries [Spain and Portugal], however, there was a steep upward curve and was approximately 25 percent in Spain and 18 to 20 percent in Portugal. You can compare the difference. I can also see this from our own portfolios that here in Poland there is extremely short-term lending at the moment, and I almost feel as if I am in El Dorado here, where we just have to attain those same levels [as exist in Spain and Portugal] here. It's just that we have to set up the appropriate structures and digest all the work behind this.
An example of the current situation here is that someone once came to me whose company was experiencing liquidity problems and I asked him to explain the situation. He told me that he hadn't been able to pay his ZUS [social security contributions] for two months because he was short of money, so I got him to detail his assets, which were that he had bought a couple of buildings, and had received a loan as part of this, repayable over five to six years, and now he was in the last year of the repayment schedule. He told me that he just couldn't afford the high debt service he was obliged to pay. And I explained that if he had bought a building for three or four million zloty, then it's a real estate asset, which he acquired four or five years ago, meaning it's clearly worth more now than it was then. I told him: "You borrowed about ten percent of the initial amount from the bank and you say you have a problem?" I advised him to go to his bank and ask them for a restructuring of this transaction. You have an asset that is worth some zł.4 million and have an outstanding loan amount of around zł.500,000, so you just need to get back to the bank and leverage it back and pay what you have to pay. He could leverage the building up to two million and buy new machines, hire new people, and so on. There's no risk for the bank and he is a rich man, though he wasn't aware of it before, and his bank hadn't advised him properly, which I find quite shocking.
To what extent do bankers look more favorably on developers who can put up buildings very quickly and sign big pre-leases with new tenants?
We don't. In a way the bank has an easy role to play in this process. Even if a company is close to bankruptcy, I can usually finalize an absolutely safe deal for the bank. Depending on what kind of product or client I have in front of me, or what location, I can structure my deal around these, and do so at any time for all kinds of project.
